Boardroom baddies

CFO: Magazine for Senior Financial Executives,  August, 2005  by James Montalto

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Do you have a problem child on your board of directors? If you do, expect to take some heat from The Corporate Library. The independent research firm that provides corporate-governance data is singling out underperforming board members and designating them "problem directors." Its goal is to pressure fellow directors, executives, and shareholders into holding the board more accountable for company performance and getting rid of ineffective directors.

"Failed CEOs and directors of failed companies still serve on boards today," says Nell Minow, editor and co-founder of The Corporate Library. "So it's been our job to identify, and in fact embarrass, directors if they do a bad job." That includes directors involved in corporate bankruptcies, major litigation, regulatory infractions, major accounting restatements, and other corporate scandals.

The Corporate Library flagged Ronald Ferguson, a former consultant for General Re and an outside director for Colgate-Palmolive Co. Ferguson is listed as a problem director because he refused to answer questions from regulators about a transaction between General Re and insurer American International Group that allowed AIG to inflate reserves.

To some people, the designation is the financial equivalent of a scarlet letter. Gavin Anderson, CEO of corporate-governance ratings agency GovernanceMetrics International, is quick to point out that Ferguson's behavior is not an accurate reflection of either Colgate's or its board members' integrity. "Colgate is known for excellent governance. It has a high degree of transparency and disclosure," he says. (Colgate declined to comment on Ferguson.) A harder look should instead be given to directors with long tenures at companies that struggle for years, says Anderson. "That suggests to me that the board hasn't taken actions to rectify problems," he says.

According to Beverly Behan, a partner in the corporate-governance practice of Mercer Delta Consulting LLC, addressing and removing underperforming directors is not as simple as it seems. "Historically, boards would rather turn a blind eye to underperformers. Most members are distinguished colleagues or well respected in their fields, so approaching them and telling them to shape up or leave can be awkward," she explains.

But board members that do nothing, says Minow, are equally to blame. "If they don't have the courage to stand up to someone who has a bad reputation and say, 'You need to step it up,'" she counters, "then they shouldn't be on the board either."

COPYRIGHT 2005 CFO Publishing Corp.
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